World stocks and the euro rose on Thursday as solid European bond auctions eased worries about the euro zone debt crisis, while encouraging earnings reports from Morgan Stanley and Bank of America bolstered Wall Street.

The euro hit two-week highs as good demand for European government bonds offset fears over funding costs and worries about a potential Greek debt default. The improved sentiment helped European shares advance for a fourth straight session.

Lending support to the euro, Spain passed its biggest test of market sentiment so far this year, selling more longer-term debt than hoped, while France raised almost 9.5 billion euros in its first bond auctions since Standard & Poor's stripped the country of its AAA rating last Friday.

U.S. data also suggested the momentum for recovery was building in the world's largest economy. The number of Americans filing for new jobless benefits dropped to a near four-year low last week, although a reading on factory activity in the U.S. Mid-Atlantic region came in below expectations.

The broad-brush impression from the data is that it's a Goldilocks setup: inflation tame, but economic growth showing signs of accelerating, said Greg Anderson, senior currency strategist at Citigroup in New York.

World stocks, as measured by MSCI's all-country world index <.MIWD00000PUS>, rose 0.9 percent to hit 2-1/2 month highs.

The three main U.S. stock indexes continued to rise to levels last seen in late July and early August, when markets tumbled on fears of a double-dip recession and S&P's subsequent downgrade of U.S. Treasury debt.

Stocks rallied as more U.S. financial institutions followed Wall Street's biggest bank, Goldman Sachs , in reporting encouraging earnings for the fourth quarter. Goldman announced a 56 percent drop in quarterly profit on Wednesday, but still beat analysts' estimates.

On Thursday, Bank of America Corp rose as much as 7 percent before closing up 2.4 percent at $6.96. The bank reported a fourth-quarter profit, reversing a year-earlier loss, helped by one-time items and lower expenses for bad loans.

Morgan Stanley ended up 5.4 percent at $18.28 after lower quarterly results, which still beat estimates.

The better-than-expected results from Morgan Stanley and Bank of America lifted the overall market, said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

People were expecting absolute disaster. It wasn't an absolute disaster and people looked at those numbers and walked away thinking both those companies wouldn't need to raise more capital, Massocca said.

The Dow Jones industrial average <.DJI> settled up 45.03 points, or 0.36 percent, at 12,623.98. The Standard & Poor's 500 Index <.SPX> closed up 6.46 points, or 0.49 percent, at 1,314.50. The Nasdaq Composite Index <.IXIC> ended up 18.62 points, or 0.67 percent, at 2,788.33.

The benchmark 10-year U.S. Treasury note was down 23/32, with the yield at 1.977 percent.

The FTSEurofirst 300 <.FTEU3> index of top European shares closed up 1.1 percent at 1,046.30, near 5-1/2 month highs.

Stock markets around the world have rallied since the start of the year, bolstered by positive U.S. data and extra cash from central banks' efforts to bolster banking liquidity.

The euro hit a session high in late trading, rising around 0.8 percent to 1.2969.

Encouraging demand for government bond offerings in Europe fed the stronger sentiment there, with France and Spain together selling about $16 billion worth of new paper.

Spain sold 6.6 billion euros ($8.5 billion) of debt, more than the planned 4.5 billion, and demand for the 10-year bonds in the sale was more than twice the amount on offer. France sold 9.5 billion euros at lower yields to previous auctions.

Analysts said the bond sales showed investors were becoming less nervous about the ability of euro zone governments to refinance their debts.

The auctions went so well, hopes were raised that the European Central Bank's longer-term liquidity provision was helping to ease funding pressures on peripheral issuers.

Potential snags as regards Greece's (private sector) deal and Italy's surge in redemptions from February both, however, leave a question mark over how sustainable this positive trend will be. For now, though, the glass half-full brigade have the upper hand, said Richard McGuire, rate strategist at Rabobank.

Continuing talks on Greek debt restructuring also helped sentiment, although there was little progress toward a deal, crucial for Athens to avoid a chaotic default.

The newsflow we are seeing is reasonably encouraging for risk, with the IMF headlines yesterday and hopes growing over the Greek restructuring talks, said Tom Levinson, currency strategist at ING.

The International Monetary Fund announced on Wednesday that it would seek to more than double its war chest by raising $600 billion to help countries deal with the fallout from the crisis.

In commodities trading, London's Brent crude oil rose nearly 1 percent to finish at $111. 55 a barrel as risk appetite improved on hopes the euro zone debt crisis was slowly being resolved and on signs of steadier global economic growth.

Copper futures in London closed up 1.5 percent, after touching 4-month highs on global demand expectations.

(Additional reporting by Chuck Mikolajczak in New York, and Richard Hubbard and Neal Armstrong in London; Editing by Chizu Nomiyama and Dan Grebler)